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11/22/2024 02:25:58 am

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'Fears of an Economic Meltdown in China are Overblown' - Experts

Overblown Fears

(Photo : Getty Images/ChinaFotoPress) A member of staff in a bank shows both sides of a yuan note in the photo above taken in Anqing, China. Fears of an economic meltdown in China are overblown, experts have said, as the country is still likely to remain the single biggest driver of growth in the global economy this year.

The latest upheaval in China's stock and currency markets -- which spread gloom among investors as the year opened and more recently weighed oil prices down to their lowest in years -- does not mean that the Chinese economy is on the edge of collapse.

Fears of an economic meltdown in China are overblown, experts have said, as the country is still likely to remain the single biggest driver of growth in the global economy this year.

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International Monetary Fund (IMF) managing director Christine Lagarde is confident China's economy will weather the current storm, and has said that countries that depend on China's trade to buttress their own economies have no cause for worry.

"China will remain the second largest economy in the world after the US," says Lagarde, allaying fears that China's economy is about to close shop.  "Its economy will continue to grow next year, meaning that it will continue buying raw materials."

The jitters are understandable.  Seven years ago, the collapse of the US economy precipitated an economic downturn felt across the world, an ignominious role that was then passed on to Europe, with a sovereign debt crisis that rattled investors throughout the globe.

"If things were to get really disruptive, global growth would stall to where the US would be affected," says George Goncalves, a rates strategist at Nomura in New York.  "These issues started percolating last year and they don't just go away because the calendar year has changed."

Investors have expressed doubt over the numbers presented by China's policymakers.  And some have grown increasingly worried that Chinese authorities grappling with the country's slowing economy may set off a chain reaction that will hurt other countries.

But those familiar with the inner workings of China's economic policies -- and indeed its options in the event of some unforeseen economic disaster -- are not as nervous.

Domenico Lombardi, a global economist at the Center for International Governance Innovation in Canada, notes that China's growth prospects have remained stable through two weeks of turbulence in the markets.

"We have to look at the real economy, the fundamentals, the [government's] reform agenda," Lombardi says. "So far, it doesn't look like any pullback."

That view is shared by Sara Johnson, senior research director of global economics at IHS, who claims there is only a 25 percent chance that China's economy will slow to less than five percent this year.  She says this would be "a hard landing" in China's case, but even then the country would be managing a growth rate that is nearly twice the projected 2.7 percent growth in the US economy for 2016. 

By all accounts, in fact, China's economy is on track to a 6.3 percent growth this year, an estimate shared by both the IMF and the consulting giant IHS.  Experts say much of that growth will spring from China's often overlooked service sector, which now accounts for half of the country's economy and has been its main engine of growth for the last three years.

"It's quite clear that China's services sector is doing much better than the manufacturing and construction sectors," says Jianguang Shen, an economist at Mizuho Securities in Hong Kong.

Some analysts have even pointed out that, with foreign reserves amounting to around $3 trillion, Chinese officials can -- in a worst case scenario -- simply throw money at the problem, a fallback strategy that Beijing has employed repeatedly in the past.  

"Pessimism is feeding on itself," Johnson says of the panic that has gripped investors and bankers in the past few days, adding, "China's government has ample financial resources to constrain any major slowdown."

Barry Bosworth, an Asia economic expert at Brookings Institution, agrees.

"What matters is that China is a domestically-based economy," he tells the Los Angeles Times.  "It's a great big domestic economy, and the threat of collapse is very small.  It's just got too much wealth behind it."

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